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Panel pessimistic on economy

FRANKFORT — Gov. Steve Beshear's prediction of a budget shortfall of $800 million to $1 billion in the upcoming fiscal year seems plausible, a leading economist said Monday after being briefed about Kentucky's economy by state budget officials.

Lawrence Lynch's assessment came after state officials presented data that suggests that the state's economy probably won't improve until 2010.

The Consensus Forecasting Group, a panel of independent economists chaired by Lynch, must now make a more precise determination of when and how quickly the economy will turn around, so lawmakers can revise the state budget for the fiscal year that starts July 1.

Lynch, a retired economics professor at Transylvania University, said after the meeting that it's likely the group will go with a pessimistic economic model, which has the economy recovering late in 2010 and making slow but steady improvements.

"It is pretty glum," Lynch said of the national and state economic forecasts.

The group is expected to forecast state revenues for the next fiscal year on May 29. In the next 11 days, the five economists will analyze information that state budget officials gave them on Monday about the economy.

Beshear also has asked for initial revenue predictions for the following two fiscal years. He is considering calling a special legislative session in coming weeks to deal with the expected budget shortfall.

Mary Lassiter, the state's budget director, told the group Monday that the governor needed preliminary numbers for the following two fiscal years because the state is expected to receive federal stimulus dollars that could be used to help plug some potential holes. But the state needs to know the future financial picture before deciding how much of the stimulus dollars to use this fiscal year, Lassiter said.

The state will receive about $3 billion over the next several years from the federal stimulus package. However, only about $651 million of that money can be used to help with the state's budget. And the vast majority of that money — about $533 million — must be spent on K-12 and post-secondary education.

On Monday, Greg Harkenrider, the deputy executive director for the Governor's Office for Economic Research, and his team gave the group an overall financial picture of the state and national economy.

There have been some minor improvements in the national economy — retail sales finally went up in January, and manufacturers' new orders also edged up slightly. However, job growth is still likely to trail other numbers, Harkenrider said.

Although people might be spending a bit more, companies have excess inventories and are selling those goods without producing new goods, Harkenrider said.

"Employment can lag a recovery," Harkenrider said. "Job losses have already been profound."

The other economic models that the group could choose to base their revenue projections on include an optimistic scenario, which has the economy recovering quickly, and a control scenario, which has the economy beginning to show signs of recovery in late 2009 or early 2010 and slowly picking up speed.